This is great news for the world, and there are more important things than our portfolios (really!)
But if Zoom is by far your top holding, like it is for me, and you see it down 20% premarket and down still further the next day, the news feels somewhat bittersweet (sorry to admit).
We all knew the news was coming, it was just a question of when.
I’d said in a post just a couple of weeks ago:
“There are reasons why the stock price COULD plummet in the coming months, the most obvious being vaccine news and a sector rotation.”
So now the news has happened. I’m not actually in the camp that the sell-off is all reactionary or completely unwarranted, as it’s to be expected. The growth prospects of Zoom ARE somewhat entwined with Covid, so vaccine news understandably causes a re-rating of its share price and of those growth assumptions.
The question is now, where will that re-rating settle, how long will it be until the vaccine is rolled out, and how will this impact Zoom’s growth.
Here’s what we know about the vaccine:
- Covid is not over. The pandemic is reaching worldwide highs of daily cases, with peaks across the US and lockdowns already across Europe. We are heading into winter, which coincides with flu season.
- The Pfizer vaccine is 90% effective, they anticipate being able to supply 50 million doses by the end of 2020, and a further 1.3bn by the end of 2021. Pending approval which might be expected by end of this month.
- There are a number of other vaccine trials being developed in parallel, with much optimism over successful results of these being announced in coming weeks.
- The vaccine is expected to be rolled out first to the most vulnerable, as early as the end of this year, and distributed more widely in the early months of 2021
- My take here: with general unrest of lockdown in much of the world, and the economic damage of that, there may likely be a push to return to ‘normality’ as soon as the most vulnerable can be vaccinated, and before mass vaccination.
- Some scientists are predicting a return to ‘normality’ by spring 2021.
I probably didn’t expect any vaccine news for another few months, but perhaps that’s just psychology - you spend so long in lockdown you can’t see a way out. I was really eyeing mid-late 2021 for a vaccine to be rolled out. This maybe brings the timeline forward 6 months, the same time as Zoom had to scale up in their Q1&2. So when will the new vaccine reality settle in?
And what does this really mean for Zoom?
Eric Yuan, in his Q2 earnings call back in September had said:
“Good news, we do have time for next 10, maybe 12 months, we can optimize what’s the future workplace look like.”
If the vaccine is rolled out successfully in the next 6 months, as many seem to expect, this may cut down Yuan’s cited timeframe of the ‘Covid environment’, and perhaps impact his vision of Zoom capitalising in that setting.
Kelly Steckelberg, CFO:
While better-than-expected churn was one of the drivers to our Q2 outperformance, we did experience a significantly higher level of overall churn in Q2 as compared to historical rates. As customers with 10 or fewer employees have increased to 36% of our revenue, we are assuming a higher rate of churn due to this mix shift.
The most likely impact of a ‘post Covid’ world in the near term will be churn of Zoom’s customers, particularly those with 10 or fewer employees. One of the things I was really excited about in Zoomtopia was ‘OnZoom’, which might create some stickiness on the platform and an altogether new segment of customers. How long they will have to cement that stickiness now, remains to be seen.
With a continuation of the pandemic for the entirety of Q3 (up to 30th October), I remain convinced that Zoom will smash Q3 earnings out of the park. And I think it’s safe to say Q4 through these winter months will be a similar story. We may also have first sight of Zoom Phone revenue contribution in the beginning of the year. Q1 2021 will be up against a softer YoY comparative, and it’s unlikely Zoom’s growth rate will tail off then either.
However, with a torrent of vaccine related news likely to come over the coming weeks and the likely imminent approval of the vaccine, my concern now is that this upside potential won’t be realised, but more than offset by this sentiment shift. Even if Zoom reports YoY revenue growth of 400%, 450%, or 500% at the end of the month, how will the market react to that, with a vaccine around the corner. The risk/reward seems to have shifted.
I don’t personally see a full return to ‘normal’ post Covid, companies will always need a remote work option and there are practices which will undoubtedly stick. However, it’s undeniable that Zoom benefited from the Covid environment, and now that the light can be seen at the end of the tunnel some near term headwinds could materialise, first in terms of market sentiment and then reaching an inflection point on its growth rate. The prolonged continuation of the Covid environment did have some near-term bearing on my conviction. And I’ve had to ask myself if I still felt comfortable holding such an outsized position going into that.
Zoom rose to the challenge and scaled up extraordinarily in the first place to meet the demands of the pandemic. Now will it be able to execute on its advantage in the looming post Covid world? That is the $m question. So far, they have not put a foot wrong, but circumstances have been favourable.
Has the story changed? Maybe. This a part of the story which we knew was coming all along. We just don’t know how the chapter ends yet. I am cautiously optimistic, but a little less certain.
Taking a step back, perhaps the 30% or so drop we’ve already taken is a small price to pay for what is undoubtedly great news for the world. And this helps to roll with the hit I (and many of us) have just taken to our portfolios 